Changes in urban land values: 1836–1970

A model is developed for measuring the return to holding land and those returns are examined using a random coefficient estimation procedure for specific periods from 1836 to 1970. This statistical model provides a mean rate of return for land and a predictor for each time period. The results suggest that the long-term return to holding land is no higher than the rate of return to holding high-grade bonds. For shorter holding periods, the returns vary significantly.     

The maturity structure of term premia with time-varying expected returns

This paper analyzes the maturity structure of term premia using McCulloch’s US Treasury yield curve data from 1953–91, allowing expected returns to vary across time. One, 3, 6, and 12 month holding period returns on maturities up to 5 years are projected on 3 ex ante variables to compute time-varying expected returns, and simulations are employed to generate distributions of conditionally expected return premia. The likelihood of expected returns monotonically increasing in maturity (as implied by the liquidity preference hypothesis) is relatively high when the yield curve is steep and interest rates are high, and with longer holding periods, but low in other cases. The hypothesis that intermediate maturity bonds have the highest expected returns (a “hump-shaped” maturity-return pattern) around the onset of recessions does not receive much support.     

Day-of-the-week effects in commercial paper yield rates

In order to minimize short-term financing costs, corporations issue commercial paper instead of seeking bank loans. We examine the changes in the daily rates of commercial paper over the last two decades. Our most interesting finding is based on a consistent and significant negative return on Wednesdays as compared to other weekdays over the sample period. We use t-tests, non-parametric tests and the binary regression developed by French [J. Finan. Econ. 8 (1) (1980) 55] to confirm our results. Finally, we deduct the return for each Wednesday from the average return for that week and find that Wednesday returns are significantly lower. Consistent with other money market instruments like T-bills and federal funds, we show that a day-of-the-week effect exists in the commercial paper rates.     

A reexamination of the market efficiency hypothesis: Evidence from an electronic intra-day,inter-dealer FX market

Researchers acknowledge that the evidence of autocorrelation (price dependency) in daily/weekly asset returns provides no conclusive evidence against the market efficiency hypothesis since the holding period of actual speculative positions may be less than a day. Using a high frequency (up to one hundredth of a second), transaction-based, electronic foreign exchange (FX) brokerage data set, we show that dealers in this market tend to close their speculative positions in less than a minute. We provide evidence that there is a significant negative autocorrelation in the rate of return on DM/USD exchange rate. However, when we sample data at frequencies shorter than a minute, profits are infeasible for two reasons: (1) the structure of the autocorrelation pattern is not consistent enough; (2) the largest potential speculative profit derived from the autocorrelation pattern is smaller than the regulated tick size. Our results support the market efficiency hypothesis as dealers have evidently engaged potentially profitable speculation based on price dependency.     

Identifying the best companies for leaders: does it lead to higher returns?

Since 2002, Chief Executive magazine, in conjunction with the Hay Group, has published a list of the Top 20 Companies for Leaders. In this paper, we examine the performance of those companies listed as being the best for leaders. We examine the announcement impact on share price associated with the press releases for firms included in the list and holding period returns between subsequent survey releases. While we generally do not find a significant difference in the performance of the Best Leader sample compared with either the market or the matched sample, we do find that the Best Leader sample outperforms other benchmarks on a raw and risk‐adjusted basis during times of high market volatility. Copyright © 2009 John Wiley & Sons, Ltd.     

Short sale and stock returns: Evidence from the Taiwan Stock Exchange

Using short sale data of the Taiwan Stock Exchange from January 1991 to September 2004, we examine the informational role played by short interest in stock price formation. Consistent with previous findings based on the US and Australian stock markets, our results show that heavily shorted stocks generate significant and negative risk-adjusted abnormal returns. Moreover, the negative abnormal returns decrease in magnitude and also become statistically insignificant as the holding period extends from 1 month to 1 year. In addition, we test the effect on stock price overvaluation of the interaction of a short sale constraint and a dispersion of opinion. When using turnover ratio as a proxy for a dispersion of opinion, we find that even when the holding period is 6 months, the overvaluation is still significant. Moreover, when a high degree of a dispersion of opinion is captured by a high relative short interest and a high relative margin trade level, the overvaluation remains statistically significant even for a 1-year holding period.     

An information diffusion model for momentum effect based on investor wealth

We propose a private information diffusion model to explain the momentum, which considers different amounts of investor wealth and uses the proportion of informed investors’ wealth to measure information diffusion speed. Different distributions of investor wealth can lead to different information diffusion processes, and the speed of information diffusion is positively correlated with the concentration of investor wealth. Our empirical results reveal the relationship between momentum return and information diffusion speed by the S&P 500 stocks in two periods of the upmarket. The results show that stocks with faster information diffusion speed gain higher time-series momentum returns, especially under short holding period strategies. These results provide new evidence for the correlation between information diffusion and the momentum effect.     

Jumps in cross‐sectional rank and expected returns: a mixture model

We propose a new nonlinear time series model of expected returns based on the dynamics of the cross‐sectional rank of realized returns. We model the joint dynamics of a sharp jump in the cross‐sectional rank and the asset return by analyzing (1) the marginal probability distribution of a jump in the cross‐sectional rank within the context of a duration model, and (2) the probability distribution of the asset return conditional on a jump, for which we specify different dynamics depending upon whether or not a jump has taken place. As a result, the expected returns are generated by a mixture of normal distributions weighted by the probability of jumping. The model is estimated for the weekly returns of the constituents of the SP500 index from 1990 to 2000, and its performance is assessed in an out‐of‐sample exercise from 2001 to 2005. Based on the one‐step‐ahead forecast of the mixture model we propose a trading rule, which is evaluated according to several forecast evaluation criteria and compared to 18 alternative trading rules. We find that the proposed trading strategy is the dominant rule by providing superior risk‐adjusted mean trading returns and accurate value‐at‐risk forecasts. Copyright © 2008 John Wiley & Sons, Ltd.     

An examination of ex-ante factors and their influence on equity carve-out long-term performance

This study examines the influence of several ex-ante factors on three-year market-adjusted returns of two-stage carve-out combinations from 1988 to 2006. We observe that several factors maintain their significance over a three-year period after equity carve-out ex-dates. Also, we report that, contrary to Vijh (J Bus 75(1):153–190, 1999), negative three-year carve-out returns are statistically significant. In addition, we note that negative combination carve-out/spin-off three-year returns are higher than those of carve-outs acquired by third parties or reacquired by their parents. Moreover, we observe that our independent variables explain 14.56% of the multiple regression three-year returns for carve-outs. Also, our negative correlation of three-year returns with initial period returns supports the “leaning against the wind” hypothesis of Loughran and Ritter (Rev Financ Stud 15(2):413–443, 2002). In addition, our results for the post-bubble period (2001–2006) provide an extension of the changing issuer objective function noted by Loughran and Ritter (Financ Manage 35(3):23–51, 2004) for IPOs and Hogan and Olson (J Financ Res 27(4):521–537, 2004) for equity carve-outs.     

The week-of-the-month effect in stock returns: The evidence from the S&P Composite Index

Theweekend effect and theyearend effect are some of the seasonal anomalies in financial markets that have been widely discussed in the finance literature. In this paper, using weekly observations of the S&P Composite Index over the period from July 1962 through June 1990, plus several subperiods, the authors identify the presence of a thus far unknown seasonal anomaly in the form of aweek-of-the-month return pattern in the stock market. The results suggest the existence of a statistically different weekly return pattern for different weeks of a month. Specifically, the returns during the first week of a month tend to be significantly positive while the returns during the other weeks of a month are statistically indistinguishable from zero.     

Return interval,dependence structure,and multivariate normality

We focus on changes in the multivariate distribution of index returns stemming purely from varying the return interval, assuming daily to quarterly returns. Whereas long-tailedness is present in daily returns, we find that, in agreement with a well-established idea, univariate return distributions converge to normality as the return interval is lengthened. Such convergence does not occur, however, for multivariate distributions. Using a new method to parametrically model the dependence structure of stock index returns, we show that the persistence of a dependence structure implying negative asymptotic dependence in return series is the reason for the rejection of multivariate normality for low return frequencies.     

Returns to Schooling and Bayesian Model Averaging: A Union of Two Literatures

Abstract.  In this paper, we review and unite the literatures on returns to schooling and Bayesian model averaging. We observe that most studies seeking to estimate the returns to education have done so using particular (and often different across researchers) model specifications. Given this, we review Bayesian methods which formally account for uncertainty in the specification of the model itself, and apply these techniques to estimate the economic return to a college education. The approach described in this paper enables us to determine those model specifications which are most favored by the given data, and also enables us to use the predictions obtained from all of the competing regression models to estimate the returns to schooling. The reported precision of such estimates also account for the uncertainty inherent in the model specification. Using U.S. data from the National Longitudinal Survey of Youth (NLSY), we also revisit several 'stylized facts' in the returns to education literature and examine if they continue to hold after formally accounting for model uncertainty.     

Bayesian inference in a correlated random coefficients model: Modeling causal effect heterogeneity with an application to heterogeneous returns to schooling

We consider the problem of causal effect heterogeneity from a Bayesian point of view. This is accomplished by introducing a three-equation system, similar in spirit to the work of Heckman and Vytlacil (1998), describing the joint determination of a scalar outcome, an endogenous “treatment” variable, and an individual-specific causal return to that treatment. We describe a Bayesian posterior simulator for fitting this model which recovers far more than the average causal effect in the population, the object which has been the focus of most previous work. Parameter identification and generalized methods for flexibly modeling the outcome and return heterogeneity distributions are also discussed.Combining data sets from High School and Beyond (HSB) and the 1980 Census, we illustrate our methods in practice and investigate heterogeneity in returns to education. Our analysis decomposes the impact of key HSB covariates on log wages into three parts: a “direct” effect and two separate indirect effects through educational attainment and returns to education. Our results strongly suggest that the quantity of schooling attained is determined, at least in part, by the individual’s own return to education. Specifically, a one percentage point increase in the return to schooling parameter is associated with the receipt of (approximately) 0.14 more years of schooling. Furthermore, when we control for variation in returns to education across individuals, we find no difference in predicted schooling levels for men and women. However, women are predicted to attain approximately 1/4 of a year more schooling than men on average as a result of higher rates of return to investments in education.     

The effect of ESOP adoptions on corporate performance: are there really performance changes?

Employee Stock Ownership Programs (ESOPs) have long been promoted as a motivational tool: employees become profit‐minded owners. Latterly, however, more ESOPs are being used as part of a takeover defense: here the ESOPs main purpose is to put more company stock in friendly hands—the employees—who, like existing management, could suffer layoffs, etc. in a hostile takeover. We find that, as a group, only the takeover‐related ESOPs are associated with increased leverage (itself a takeover defense). Non‐target firms show no long‐term increase in debt‐to‐assets. We find little evidence to support the motivation hypothesis: while actual labor costs are lower for ESOP firms, after industry‐adjusting they tend to be unaffected or higher. We find that a few measures of firm financial performance [return‐on‐equity (ROE), return‐on‐assets (ROA), net profit margin (NPM)] do improve significantly, but this appears to be largely a short‐term effect. Industry‐adjusted holding period returns appear to be unaffected by the ESOP; however, ESOP firms that leverage show evidence of long‐term market underperformance. We conclude that ESOPs provide, at best, only a short‐term boost to corporate performance. Copyright © 2000 John Wiley & Sons, Ltd.     

Media Coverage and the Stock Market Valuation of TARP Participating Banks‡

We examine the impact of media coverage of the Capital Purchase Program (CPP) under the Troubled Assets Relief Program on the equity market valuation of participating bank holding companies (CPP banks). We document substantial negative coverage of the CPP and its participants over the five quarters following the program's initiation. We find that the extent of negative media coverage about the CPP exerted substantial downward pressure on the stock returns of CPP banks, decreasing their valuation relative to bank holding companies not participating in the program. We show that our findings cannot be explained by differences in the banks’ financial viability at the CPP's initiation, new information about their performance being released to the market after the CPP's initiation or preceding stock returns causing the negative media coverage. Our findings highlight the importance of investor sentiment, as reflected by the tone of media coverage, in banks’ valuation during a period of high uncertainty in financial markets.     

A reduced form framework for modeling volatility of speculative prices based on realized variation measures

Building on realized variance and bipower variation measures constructed from high-frequency financial prices, we propose a simple reduced form framework for effectively incorporating intraday data into the modeling of daily return volatility. We decompose the total daily return variability into the continuous sample path variance, the variation arising from discontinuous jumps that occur during the trading day, as well as the overnight return variance. Our empirical results, based on long samples of high-frequency equity and bond futures returns, suggest that the dynamic dependencies in the daily continuous sample path variability are well described by an approximate long-memory HAR–GARCH model, while the overnight returns may be modeled by an augmented GARCH type structure. The dynamic dependencies in the non-parametrically identified significant jumps appear to be well described by the combination of an ACH model for the time-varying jump intensities coupled with a relatively simple log-linear structure for the jump sizes. Finally, we discuss how the resulting reduced form model structure for each of the three components may be used in the construction of out-of-sample forecasts for the total return volatility.     

Loss from the chasing of MAX stocks: Evidence from China

We evaluate the implications of the MAX effect in the Chinese financial market. First, the MAX effect prevails in China: A zero-cost MAX strategy, which goes long (short) stocks with the highest (lowest) maximum daily return in the prior month, generates significant losses over the full sample period. Second, further analysis on firm characteristics confirms that the MAX stocks exhibit lottery-like features, and the (negative) performance of the MAX strategy varies over time and is related to investor sentiment. Third, the MAX effect gets weaker after the introduction of short-selling in 2010. Finally, we document that there exists a reversed MAX effect among mutual funds, because a similarly implemented MAX strategy generates significant positive risk-adjusted returns among equity funds in China.     

Currency depreciation effects on ADR returns: evidence from Latin America

We use seemingly unrelated regressions (SUR) and multivariate regression models (MVRM) in a panel sample of 74 American depository receipts (ADR) programs from Argentina, Brazil, Chile, and Mexico during the period May 1994 to May 2009 to analyze the behavior of ADR returns during the 300-day period surrounding the currency crises breakdown in the originator??s country. Controlling for the underlying stock and local and host country equity indices, we find that ADRs generate significant negative abnormal returns during currency crises, due to translation exposure. Abnormal returns remain statistically significant even in crises triggered by currency depreciations as small as 3.6%. The results persist after including exchange rate returns as a control variable and after an orthogonalization procedure of exchange rate against local country indices. In agreement with ADR literature, our results show that ADR prices are determined primarily by the underlying stock, exchange rates, and host country index, in that order. Moreover, we observe how market integration has become evident in more recent times as the coefficients for the U.S. stock market have increased its contribution to ADR price discovery.     

Illiquidity,transaction cost,and optimal holding period for real estate: Theory and application

Choosing the optimal holding period is an important part of real estate investment decisions, because “when to sell” affects “whether to buy”. This paper presents a theoretical model for such decision making. Our model indicates that the optimal holding period is affected by both systematic and non-systematic factors—market conditions (illiquidity and transaction cost) and property performance (return and return volatility). Other things being equal, higher illiquidity and transaction costs lead to longer holding periods, while higher return volatility implies shorter holding periods. Our empirical application suggests that the optimal holding period based on our model is quite consistent with previous empirical findings. In addition, we find that when illiquidity risk is incorporated the true real estate risk is significantly higher than the conventional risk estimate. Therefore, the current practice of real estate valuation, which is naively borrowed from finance theory, substantially underestimates real estate risk.